Analyst: Dell Stock Is 'A Nice House In A Tough Neighborhood'

Dell Technologies Inc DELL shares jumped Friday after the company reported better-than-expected second-quarter earnings and revenue numbers.

The market responded positively to the report, and the numbers were good enough for one analyst to raise their price target for the stock.

The Analyst

Raymond James analyst Simon Leopold reiterated an Outperform rating on Dell and raised the price target from $61 to $62.

The Thesis

Leopold said Dell’s 34% gross margin was well above Raymond James projection of 32% and was the single biggest reason for the earnings beat on Thursday. (See his track record here.) 

Despite channel checks suggesting that Dell has lowered prices on servers and other products, the analyst said input costs must have declined even further to boost overall margins.

Dell’s commercial PC segment was a bright spot in the quarter and helped offset weak trends in servers and storage, he said. 

Dell reported $9.08 billion in commercial PC revenue, beating Raymond James’ forecast of $8.72 billion.

The commercial Windows refresh is only about 60% complete and should remain a tailwind for Dell through the first half of 2020, Leopold said. 

While investors cheer the earnings beat and immediate market reaction, Leopold said Dell will continue to face challenges associated with being “a nice house in a tough neighborhood.”

“We expect weaker gross margin in 2HFY20 because input costs have stabilized, but pricing pressure continues in the ISG (Servers and Storage) segment coupled with a mix shift in PCs toward consumer.” 

Dell shares were up 7% at $50.09 at the time of publication Friday. 

Benzinga’s Take

The PC business will likely remain challenged in the long-term, but Dell’s ability to grow revenue and generate record cash flow in the second quarter is evidence that it can make the most of a difficult situation. The stock is trading at a forward earnings multiple of just 6.4, suggesting downside is likely limited from a valuation perspective.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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